As discussed in a prior blog post by my colleague, (click here to read), the interplay between a title commitment and an ALTA survey is vitally important to a lender evaluating title to a property in a commercial real estate transaction. The title commitment identifies easements, restrictions, and other recorded instruments affecting the property, while the survey helps put those exceptions on the map and illustrates how they interact with the proposed development.
For a commercial lender, however, identifying an easement is only the beginning of the analysis. The more important question is: does this easement matter? Does it affect the proposed development and ultimately, the value of the lender’s collateral?
A lender financing a commercial development is concerned not only with the value of the real estate securing its loan, but also with the borrower's ability to successfully complete the development that is expected to generate that value. An easement that prevents construction of planned units, interferes with access, or otherwise limits the development may jeopardize the project and impair the lender's collateral. If the easement remains as an exception to the lender's title policy, the lender generally will not have title insurance coverage for a problem arising from that easement.
The objective of careful title review is to distinguish routine easements and restrictions that pose little concern from the exceptions that warrant further investigation before the lender advances its funds.
The Title Commitment Is a Roadmap, Not the Final Answer
Title commitments can be daunting, even to a trained eye. If you are lucky, an exception may be relatively straightforward:
Stormwater Management Pond Easement recorded in Deed Book X, Page Y.
Other exceptions may read more like:
50-foot ingress and egress easement shown on Plat recorded in Plat Book X, Page Y, pursuant to Easement Agreement recorded as Instrument No. X, as amended by Declaration recorded as Instrument No. Y and Amendment recorded as Instrument No. Z.
Understanding the second exception likely requires reviewing each referenced document. The plat may depict an easement created by an earlier deed, while a later declaration or amendment may define or change who can use it or may amend the rights that were granted. It is easy to find yourself several documents removed from the title commitment just to determine how the easement burdens the property.
That investigation matters because Schedule B identifies matters that the title insurer proposes to exclude from coverage. But even when an easement unquestionably affects the property, its existence does not necessarily mean the lender has a problem. Easements and restrictions are commonplace. The question is what rights are created by the underlying instrument and the extent to which those rights affect the property and proposed development.
Which Easements Deserve a Closer Look?
There is no universal list of “good” and “bad” easements. A utility easement along the edge of a parcel may be entirely compatible with one development, while an easement running through the proposed location of a building may present a significant problem.
Certain language, however, should cause a prudent lender to look more closely.
Consider an electrical easement. The survey may show a defined area, but the underlying instrument may grant the utility broader rights to maintain, rebuild, relocate, improve, or extend its facilities and require that the easement remain free from buildings or other obstructions. A proposed building within that area presents a very different concern from an easement along an undeveloped boundary. The important question is not simply how the easement is used today, but what the recorded instrument permits its holder to do tomorrow.
An ingress and egress easement presents different questions: Who can cross the property, where, and for what purpose? An easement benefiting one neighboring parcel may be relatively straightforward, while one created for the benefit of a larger tract and its successors may be more complicated, particularly if the benefited land has since been subdivided. Other exceptions require the same practical analysis: a stormwater or utility easement may fit comfortably within the proposed development, while a declaration or proffered condition may impose restrictions affecting how the property can be developed. The label on the title commitment does not answer the lender’s question, the underlying document does.
When an Easement Is More Complicated Than It Looks
For example, imagine a lender is financing a proposed apartment complex. A recorded plat shows a “50-foot and variable width ingress/egress easement” benefiting both the development property and an adjoining parcel. At first glance, the easement may not appear particularly concerning.
The proposed site plan, however, narrows the access area from the 50 feet shown on the recorded plat, placing portions of the planned buildings within the easement. Even if the neighboring property currently uses a different entrance and enforcement of the easement seems unlikely, its owner(s) may still have the right to use the full recorded easement. The lender therefore needs to know whether the affected buildings can be constructed as planned without interfering with those rights. It may also need to determine who presently holds the benefit of the easement and whose agreement would be required to change it.
Address the Problem Before It Becomes the Lender's Problem
Discovering a problematic easement does not necessarily kill the loan. Identifying it before closing is when the lender has the most options.
If an access easement extends into a proposed building area, for example, the developer may be able to negotiate a modification or release with the easement holder. In other circumstances, the affected portion of the project may need to be redesigned.
Further investigation may even establish that an exception listed in the commitment does not actually affect the property. If the survey and underlying records establish that the easement lies elsewhere, counsel can ask the title insurer to remove the exception rather than allow the lender to unnecessarily accept an exclusion from coverage.
A title commitment can contain dozens of exceptions, most of which will never cause the lender a problem. The challenge is identifying the one that might. That may require reading the underlying instrument, following references to older deeds and plats, determining who holds the relevant rights, and comparing those rights against the survey and proposed development.
Careful review by experienced lender's counsel can identify and address those issues before the lender advances its funds, when an unexpected easement is still a due diligence issue rather than a problem with the lender's collateral.
Julianne Kouba is a Pender & Coward attorney focusing her practice on commercial loan transactions, civil litigation and local government matters.